Terry Cardew is Banking & Capital Markets tax leader for EY’s Financial Services Office. His experience includes a variety of tax planning, consulting, and compliance projects for multi-national financial services companies headquartered in the U.S. and outside the U.S., as well as for various global real estate funds and alternative investment vehicles. In his current role, Mr. Cardew is responsible for directing the strategy for serving EY’s banking and capital markets clients, driving services and thought leadership and aligning resources to EY’s clients. Mr. Cardew also oversees EY’s Information Reporting & Withholding group, which is part of the Tax Practice, as well as EY’s Tax Reporting & Operations group, which is part of the Advisory Practice.
Mr. Cardew answered the following questions for BEPS Global Currents on May 9, 2018 regarding the U.S. Tax Cuts and Jobs Act (TCJA) and the OECD’s BEPS project:
Q: What are some of the data and reporting challenges resulting from the base erosion and anti-abuse tax (BEAT)?
A: Banks are currently trying to understand what goes into the computation of BEAT (i.e., the numerator and denominator of the threshold), as well as what information they need and how to obtain it.
Tax departments [of banks] typically work with information from the general ledger to compute their taxable income and tax provision. The information in a bank’s general ledger is generally presented in a consolidated manner, which is typically all that is required for these computations. Calculating the BEAT threshold and the potential BEAT liability, however, will require tax departments to obtain much more granular data from upstream [source] systems, and often times, the relevant data is housed in various source systems. For example, when dealing with an interest rate swap, information detailing (i) the type of swap, (ii) the entity within the U.S. consolidated group entering into a swap, (iii) the profit and loss (P&L) items, such as periodic payments, as well as realized and unrealized gains and losses, and (iv) the counterparty to a transaction, may be housed in four separate source systems. A challenge for tax departments is that they may not be familiar with these source systems nor specifically know what to ask for nor who to ask within their organization. Similarly, product controllers may not necessarily understand what information to provide and may inadvertently provide irrelevant data and/or too much data. A key for tax departments will be to (i) understand who owns the data, (ii) work with the data owners to understand the data within the source systems, and (iii) co-develop a data dictionary with these groups to extract the proper data.
Once tax departments figure out what information to obtain and how to obtain it, they will need to create a sustainable reporting process. They will need to build capabilities to (i) do data sourcing, (ii) house the data, (iii) run computations and ‘what if’ scenarios, and (iv) send the results to their tax provision, tax return and tax planning tools. Someone will then need to ‘own’ this new process, this process will presumably need to be SoX-compliant and it will have to result in proper traceability – i.e., provide an audit trail.
The Internal Revenue Service (IRS) has yet to issue guidance on BEAT reporting, including the reporting required to meet the qualified derivative exception. Notwithstanding, it is critical for banks to begin building a [reporting] process that is efficient and will provide the proper audit trail.
Q: What proactive steps can banks take to comply with this new standard?
A: Banks are in the process of analyzing their data and trying to determine whether they are subject to BEAT. We expect the IRS to issue guidance on BEAT in the near term and many banks are hesitant to do structural planning before this guidance comes out. Having said that, some banks are analyzing the potential impact of “checking the box” on certain foreign subsidiaries. The problem here, however, is that while it may mitigate a BEAT issue, it could result in a higher ETR as the income of this entity would be subject to current U.S. taxation as a [foreign] branch. Other banks are thinking about the location of their shared service centers. The landscape has changed, and factors such as the low U.S. corporate income tax rate, BEAT, regulatory concerns, and the fact that we are seeing low-cost cities pop up in the U.S. will all be factors in a bank’s decision on where to locate shared service centers in the future.
Similarly, some banks are starting to think about the impact of BEAT on their booking models. For example, if a bank has a global dealing book where the U.S. entity books the profits and pays the foreign dealers, the bank may have to consider whether to change this booking model. Basically, BEAT (as well as the 21% US corporate tax rate) is forcing banks to review their booking models
Q: What do banks think about the new interest expense limitation rules in Section 163(j)?
A: I do not think banks are overly concerned about this since they generally do not have net interest expense. Where Section 163(j) may be relevant is where a bank has an interest in a partnership that is subject to this limitation, since it is computed at the partnership level. On the other hand, banks may be interested in the provision from a ‘business perspective’; reviewing their loan portfolios and identifying customers that may be subject to Section 163(j), and offering them alternative financing structures.
Q: How are your clients determining what is included in their cost of goods sold (COGS), which is not considered a “base erosion payment” under BEAT?
A. Banks typically do not have COGS; however, where this provision/exception is relevant would be when a U.S. broker dealer pays a foreign related party to acquire foreign securities for a customer of the U.S. broker dealer. These payments [by the U.S. broker dealer] would not be subject to BEAT.
These comments represent the views of the author only, and do not necessarily represent the views or professional advice of Ernst & Young.
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